Pandemic Socialism

By introducing a uniquely disruptive shock to both supply and demand, the COVID-19 pandemic has upended longstanding ideological debates almost overnight. Suddenly, far-reaching state intervention in the economy has become necessary to save market capitalism, which is unlikely to emerge unchanged.

NEW YORK – Ironically, just as the “democratic socialist” Bernie Sanders has suspended his presidential campaign in the United States, many of his policy proposals are becoming necessary around the world. Social-distancing measures to mitigate the COVID-19 pandemic have disrupted production and household income streams alike. But the effectiveness of social distancing could be undermined by workers who lack proper health insurance, adequate sick pay, unemployment compensation, or other forms of income support or savings. These individuals will feel that they have no choice but to keep working, despite the health risks. Universal health insurance looks like the inevitable outcome, even in the US, where Sanders, virtually alone among national politicians, has advocated it for decades.

At the same time, the original supply and demand shocks – to labor and household consumption, respectively – from the COVID-19 crisis are being reinforced by the breakdown of global, national, regional, and local supply chains. And all of these real-economy shocks are causing disruptions in the financial system, too.

Under these conditions, central banks have a critical role to play in preventing disorderly financial markets from adding to the strain felt by non-financial companies and households. At a minimum, central banks must step in to ensure ample liquidity in key markets, including those for government debt, commercial paper, and key asset-backed securities such as residential and commercial mortgages.

But, equally important, central banks must ensure that liquidity for households and corporations does not dry up because of self-fulfilling, fear-driven withdrawals. Where appropriate, they can provide monetary financing for fiscal stimulus (helicopter money), so that governments that otherwise might be constrained by sovereign-bond markets do not have their hands tied.

That said, central banks are not the appropriate institutions to address business-revenue shortfalls and the risk of corporate insolvencies, or household-income disruptions and the associated problems in servicing mortgage, consumer, and student debt. True, central banks can carry some of the load temporarily, by purchasing high-yield corporate debt and low-grade commercial paper. But the big job of preventing an economic disaster invariably rests with fiscal authorities.

In the case of the COVID-19 crisis, public funding and mandates are needed to ensure that everyone can get tested expeditiously for the coronavirus. Global cooperation can play an important role here, given the imperfectly synchronized nature of national outbreaks. But, ultimately, all coronavirus-related treatment (including hospitalization) will need to be covered by the state, and only national governments can marshal funding on that scale.

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Likewise, the state will also need to provide full compensation for workers who lose income as a result of the crisis. To maintain aggregate demand, governments could introduce a temporary universal basic income, whereby every adult receives a periodic cash transfer for as long as the crisis lasts. Even the US under President Donald Trump has blundered toward this obvious palliative measure, by including in its recent $2.1 trillion rescue package a disbursement of $1,200 for every adult earning less than $75,000 per year.

But even with government-provided income support, companies are still likely to experience dramatic revenue shortfalls, owing to crisis-related disruptions to the labor force, domestic and external demand, and supply chains at all levels. Here, the state could step in as a buyer of last resort, or it could provide credit or credit guarantees to financially distressed companies. Such credit could be converted into equity, either immediately or once the crisis is over, in the form of non-voting preference shares, thereby impeding the slide into a centrally planned economy.

There should be no restrictions on eligibility for the various forms of financial support outlined here. Large corporations are just as likely as small- and medium-size enterprises, the self-employed, or gig workers to be affected by the demand shortfall and supply-chains disruptions. And though they may be able to tide themselves over for a while – owing to their superior access to bank lending and debt markets – they cannot hold out forever. Given the build-up of non-financial corporate debt before the pandemic, we could easily see a wave of corporate defaults and insolvencies in the absence of state intervention.

Banks and non-bank financial intermediaries did not start the crisis this time, but they will inevitably become a part of it and will also become candidates for state rescues and bailouts as the asset side of their balance sheets deteriorates. And command methods familiar from wartime market economies and centrally planned economies – think of Trump’s invocation of the Defense Production Act to force General Motors and 3M to produce critical supplies – could well outlive the crisis.

Finally, the new socialism will also have an international dimension. Italy, for example, will need support from the European Central Bank or the European Stability Mechanism, or else through the issuance of eurozone coronavirus bonds. Among emerging and developing economies, external debt markets are already constraining the ability of many to provide fiscal support. Addressing these limitations with more foreign aid from advanced economies – including a targeted increase in the International Monetary Fund’s Special Drawing Rights – would be the morally correct and economically sound response.

As the trajectory of the COVID-19 crisis indicates, capitalist market economies will have to give way, at least temporarily, to an improvised form of socialism aimed at restoring income flows for households and revenue flows for companies. We will then see whether the consequences of this experiment with socialism last well beyond the end of the pandemic.

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Willem, three questions. Why did you:1. Nominate the Central Bank rather than the government to issue helicopter money when you stated: “central banks are not the appropriate institutions to address business-revenue shortfalls”?2. Not nominate also local helicopter drops of “perishable” Stamp Scrip money as occurred in towns in Europe and the US during the Great Depression to enrich local governments rather than undermine local self-determination and freedoms to counter socialism?3. Not nominate the use of what you referred to as “perishable helicopter money” as you recommended in your 2014 article ‘The Simple Analytics of Helicopter Money: Why It Works – Always’?

Thank you for your comments, Shann. As regards your first question, I abide by the prevailing institutional reality, where monetary base issuance is delegated to the central bank. Helicopter money is a combined action of the Treasury (which cuts taxes, makes transfer payments to firms or households or raises spending on real goods and services) and the central bank which either buys the additional public debt issued by the Treasury to finance its fiscal operation in the primary or secondary public debt market or directly credits the Treasury's account with the central bank and monetizes these operations. For political legitimacy reasons, the fiscal decision belongs to the Treasury.

As regards your second question, what you refer to as "perishable" Stamp Scrip money issued by local governments, I would call local government-issued money with a negative rate of interest. Such local currencies were most successful in countries where the national currency had collapsed because of hyperinflation, like Germany and Austria in the early 1930s. It isn't clear why anyone would accept payment in Stamp Scrip if there is a viable national currency with a zero interest rate and a fixed exchange rate with the Stamp Scrip.

As regards your third question, I am in favor of monetary reforms that make it possible to remove the effective lower bound on nominal interest rates and thus to pay deeply negative nominal interest rates. This could be achieved by abolishing currency, by taxing currency in the spirit of Gesell, or by introducing a variable interest rate between currency and commercial bank deposits held with the central bank (reserves) in the spirit of Eisler. However, helicopter money can boost nominal aggregate demand even if none of these reforms are introduced.

RE:"the COVID-19 pandemic has upended longstanding ideological debates almost overnight."Is it now? The upending non-debate about integrity and honesty has upended the individual national narratives, and the global narratives about all kinds of distortions about what certain people present as further distortions about misconceptions of socialism, and not to any level of any kind of pandemic related cause, focus or result either.

I only can write from a specific US view. So here goes:

Example:

https://www.ft.com/content/5a3b891c-6edd-11ea-89df-41bea055720b

Will the unemployment insurance system run out of money?“States are going to burn through their trust funds,” some more quickly than others, said Ms Evermore. About half of the states do not have enough in their funds to cover a year of a normal recession. Congress would probably need to act again in several months, she said, since a deep recession was likely to follow the months-long lockdown of the pandemic — and state funds would be empty."

(Citation permission:Since the so-labelled sharing tools on the left-hand column in the Financial Times, aren't really sharing tools at all, I am noting that as far as a I know, according to all the laws that are constantly changing by the millisecond, it is supposed to be legal to cite a paragraph in a personally written comment. Otherwise how is anyone going to get more business to the Financial Times and everybody else? Don't you want your business out there? Or just keep secrets? Are secret-keepers like gate-keepers? What are house-holders and stake-holders? Do householders ever really get to become real householders, or just get gamed as pretend householders so the real stake-holders have something to take, and give back and forth to each other, without having to lift a finger? Don't Worry. Don't Fear. Pretty soon you won't have to even click, tap or turn a real or imaginary key. Also, according to copyright regs., a cited quote of one paragraph, is supposed to be legal etc. etc. etc. So thank you, for letting me share once and for all.)

Michele Evermore works for the National Employment Law Project in the US. She is addressing a real issue that just about all of the official outlets in the US should be talking and writing about for the US. She makes a pretty significant point. Personally, I have found that if a US citizen really wants to learn anything about what is actually going-on in the US, you better look to other media sources, outside of the US to find out anything.

So, thanks to the FT, and I wish I could subscribe but as a poor citizen in the US, I can only subscribe to PS. Yes, it is possible to find out what she is referring to by viewing the DOL site too. At least their most basic graph that reveals that reality about the status of the trust funds in the US, were still not obfuscated like the data on the CDC website, the last time that I looked, a few days ago on my computer.

We do not have any market capitalism to save. And yes, the economic dynamics that have existed will very likely remain, not emerge, as unchanged.

The present economy is not any kind of far-reaching state intervention economic system, or network of state intervention systems at all. The COVID-19 pandemic has not upended longstanding ideological debates almost overnight either. The COVID-19 pandemic is actually revealing certain results and consequences due to non-revealing a whole lot of real facts that really do need to be revealed, and need a whole lot more real applied work effort to correct non-focussed debates that are strategized to effectively distract from real consequential destruction to the most basic idealistic, and real functional systems that were designed to function with some reasonable intent of action with some reasonable honesty in action to gain some real effective reasonable change, based from real social contracts, and applied systems to balance actions and inactions that affect power of the state and power of the individual so many can attempt living cooperatively, while motivated by social cohesiveness and attainable group goals.

Any real facts are being revealed quite indirectly, and some very underhandedly that may eventually cause some change as many systems have just been terribly pirated and corrupted, so there aren't many real systems left for any real economic transaction to occur by real people that do need to be transacting on a daily basis. If real people were permitted, (that should be in all capital letters, so just not to confuse any mistrends of capitalism, I won't perform that action to those specific letters in that one specific word, just for the fun of it, at this present moment in time) to exchange real goods, based on local work efforts, there could be and would be something to really reflect that means something in all kinds of algorithmic charting courtesy of AI.

In other words, in any real world, who is granting what level of permission to what?

Isn't it interesting how policy shifts from Keynesian economics in times of crisis to neoclassical economics, most aptly George Stigler or Milton Friedman, during prosperous times. Ingenuity is understanding that the need of the times dictate the kind of economics. In other words, economics should serve people, not the other way around.

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Mass protests over racial injustice, the COVID-19 pandemic, and a sharp economic downturn have plunged the United States into its deepest crisis in decades. Will the public embrace radical, systemic reforms, or will the specter of civil disorder provoke a conservative backlash?

For democratic countries like the United States, the COVID-19 crisis has opened up four possible political and socioeconomic trajectories. But only one path forward leads to a destination that most people would want to reach.

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